The California Supreme Court just closed a loophole as to whether a salesperson’s duties to a buyer in a real estate transaction – when that salesperson’s broker is acting as a “dual agent” – includes the duty to learn and disclose all information materially affecting the value or desirability of the property. California’s highest court held that the salesperson does owe that duty.

In Horiike v. Coldwell Banker Residential Brokerage Company, the seller of a “luxury residence in Malibu” engaged Chris Cortazzo, a salesperson in Coldwell Banker’s Malibu West office, to sell the property. According to the Court’s opinion, Cortazzo obtained public record information from the tax assessor’s office and a building permit regarding the size of the property’s living area. Cortazzo also listed the property on the Multiple Listing Service and prepared a flier, making statements as to the size of the living area, which allegedly was different than the size listed in the public records. When a couple working with another Coldwell Banker salesperson made an offer, Cortazzo informed the couple that Coldwell Banker did not “guarantee or warrant” the square footage of the residence and he gave them a note to “hire a qualified specialist to verify the square footage.” That deal died. Then, the plaintiff in this case, a resident of Hong Kong, made an offer to buy the property through Chizuko Namba, a salesperson in Coldwell Banker’s Beverly Hills office. Cortazzo gave the plaintiff the marketing flyer and an MLS listing printout that did not specify the square footage and contained “a small-print advisement” that “Broker/Agent does not guarantee the accuracy of the square footage.”

Cortazzo did not provide the plaintiff a note to hire a qualified specialist to verify the size of the home as he had done before, but he did provide the plaintiff, through Namba, a copy of the building permit as well as a form advisory stating that only an appraiser can reliably confirm square footage and that brokers have not verified the representations in the MLS, ads, and tax assessor records. Plaintiff signed an advisory stating that broker “shall not be responsible for verifying square footage.” The plaintiff and the seller came to terms and the plaintiff purchased the property.

Before completing the purchase, the plaintiff signed an agency disclosure form required by California law entitled “Confirmation Real Estate Agency Relationships,” which indicated that Coldwell Banker was the agent of both the buyer and seller. Plaintiff also signed the form called “Disclosure Regarding Real Estate Agency Relationships” which contained the statutorily required language that a “real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction,” and that if that is the case, the agent owes a “fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer.” Cortazzo signed both forms on behalf of Coldwell Banker. The plaintiff also signed a third disclosure form, “Disclosure and Consent for Representation of More than One Buyer or Seller,” which explained that a “real estate broker...may represent more than one buyer or seller provided the Broker has made a disclosure and the principals have given their consent.”

The form described the broker’s disclosure duties “[i]n the event of dual agency” as follows: “Seller and Buyer agree that: (a) Broker, without the prior written consent of the Buyer, will not disclose to Seller that the Buyer is willing to pay a price greater than the offered price; (b) Broker, without the prior written consent of the Seller, will not disclose to the Buyer that Seller is willing to sell property at a price less than the listing price; and (c) other than as set forth in (a) and (b) above, a Dual Agent is obligated to disclose known facts materially affecting the value or desirability of the property to both parties.”
Cortazzo signed this form, too, on behalf of Coldwell Banker.

After the close of escrow, plaintiff prepared to do work on the property and reviewed the building permit and noticed that it appeared to contradict Cortazzo’s representation about the square footage of the house. He filed suit against Cortazzo and Coldwell Banker alleging, among other things, that both defendants had breached their fiduciary duties toward him, by “either deliberately misrepresenting the square footage of the living area . . . and failing to act with the utmost care, integrity and honesty…or simply failing to determine the accuracy of the representations they were making as to the living area square footage.” During the jury trial, the plaintiff agreed that he was not seeking recovery for breach of fiduciary duty as to Namba’s conduct. The judge held that Cortazzo exclusively represented the seller, not the plaintiff/buyer, and, therefore, Cortazzo did not owe a fiduciary duty to the plaintiff. Also, the judge told the jury that in order to find that Coldwell Banker was liable for breach of fiduciary duty, the jury had to find that an agent “other than Cortazzo or Namba” had breached a fiduciary duty to the plaintiff. With that limitation, the jury returned a verdict in favor of Coldwell Banker.

On appeal, the California Supreme Court gave a helpful explanation of California’s world of “dual agency.” Calling it a relatively recent development in the real estate industry, the Court held that the statutory law permits dual agency “provided that real estate agents both inform their clients of the agency relationships involved and obtain the clients’ consent.” Dual agents owe a fiduciary duty of utmost care, integrity, honesty and loyalty in their dealings with either the seller or the buyer. But, they are not allowed to disclose to the buyer that the seller is willing to sell at a lower price than the listing price without the express written consent of the seller, nor can they disclose to the seller that the buyer is willing to pay a higher price than the offering price without the buyer’s express written consent. After the explanation, the Court summarized the narrow but important question it was going to answer:

“The sole question before us is whether Cortazzo, as an associate licensee representing Coldwell Banker in the sale of the Malibu residence, owed a duty to Horiike to take certain measures to inform him about the residence’s square footage: specifically, to investigate and disclose all facts materially affecting the residence’s value or desirability, regardless of whether such facts could also have been discovered by Horiike or Namba through the exercise of diligent attention and observation. Defendants acknowledge that Coldwell Banker was a dual agent, and, as such, owed this fiduciary duty of disclosure to both Horiike and the trust. But defendants contend that Cortazzo himself exclusively represented the trust and therefore could not have breached any fiduciary duty toward Horiike – who, they assert, was represented exclusively by Namba.”

The Court concluded that Cortazzo – as a salesperson – owed the parties to that transaction the same duties as the broker on whose behalf he acted. “Accordingly, when Coldwell Banker agreed to act as a dual agent for both Horiike and the trust in the transaction for the sale of the Malibu residence, Cortazzo, as an associate licensee of Coldwell Banker in the transaction, assumed equivalent duties to Horiike.” And, Cortazzo was charged with carrying out Coldwell Banker’s fiduciary duty “to learn and disclose all material information affecting the value or desirability of the property.”

Therefore, the Court sent this back to the trial court to let plaintiff have another opportunity, this time without the restrictions that the judge placed on him.

The Court recognized there could be problems with holding that the two salespersons each owed a fiduciary duty to both sides in a transaction when they are associates of the same broker. “But as presently written, the statute provides no basis for distinguishing between a broker’s duty to learn of and disclose all facts materially affecting the value or desirability of the property and its associate licensee’s duty to do the same.” The Court held the State Legislature could certainly enact legislation to uncouple the associate licensee’s duties from those of the brokers they represent, but they haven’t so far.